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City of Peoria v. General Electric Cablevision Corp.

decided: October 4, 1982.


Appeal from the United States District Court for the Central District of Illinois, Peoria Division. No. 81 C 1057 -- Robert D. Morgan, Judge.

Wood and Posner, Circuit Judges, and Dumbauld,*fn* Senior District Judge.

Author: Posner

POSNER, Circuit Judge.

We are required in this case to determine the proper route for obtaining judicial review of a regulation of the Federal Communications Commission whose validity is questioned in a suit on a contract. May the court in which that suit is brought determine its validity, or must the court refer the question to the FCC under the doctrine of primary jurisdiction?

In 1966 the City of Peoria granted a 20-year cable television franchise to General Electric Cablevision Corporation (GECCO), which in exchange agreed to pay the city an annual franchise fee equal to 10 percent of GECCO's gross revenues from the franchise. In 1972, however, the FCC promulgated a rule limiting cable franchise fees to 3 percent of gross revenues, 47 C.F.R. § 76.31, though with respect to existing franchises the rule (as amended in 1977) was not to take effect until 15 years after the date of the franchise, which meant, in the case of GECCO's franchise in Peoria, not until 1981.

The City of Peoria did not participate in the 1972 rulemaking proceeding or seek judicial review of the rule. But on the very day in 1981 that the rule became applicable to GECCO's franchise, the city brought this suit in federal district court against GECCO, seeking a declaration that the rule was invalid on various statutory and constitutional grounds and an order directing GECCO to continue paying the 10 percent fee specified in the franchise. The complaint was later amended to add a count based on diversity of citizenship. This count also sought, but under state contract law rather than federal law, an order directing GECCO to continue paying the 10 percent fee. GECCO impleaded the FCC as a third-party defendant, claiming that since it was perfectly willing to continue paying 10 percent, the controversy was really between Peoria and the FCC. GECCO also brought a separate proceeding before the FCC to waive the application of Rule 76.31 to the Peoria franchise. The city did not join in GECCO's petition or otherwise become a party to the FCC proceeding, though it did submit a short letter to the Commission in support of the petition.

Both GECCO and the FCC raised jurisdictional objections to the maintenance of this suit in the district court but the court overruled these objections, proceeded to the merits, held the FCC's rule invalid, and entered a judgment declaring the rule void and directing GECCO to comply with the franchise agreement as written. Shortly afterward the Commission's Cable Television Bureau denied GECCO's petition for a waiver, on the ground that neither GECCO nor Peoria had submitted any evidence that the fee was an appropriate element of Peoria's program for regulating cable television.

The district court decided three analytically distinct actions -- Peoria's action against GECCO to declare the FCC's rule invalid, an action based on the federal-question jurisdiction of the district court; Peoria's action against GECCO for a declaration of Peoria's rights under the franchise, an action based on the court's diversity jurisdiction; and GECCO's third-party action against the FCC. We must first consider whether the district court had jurisdiction over the subject matter of any of these actions.

Peoria's action against GECCO to declare the FCC's rule invalid was brought in the wrong court at the wrong time against the wrong party. Proceedings for judicial review of final orders of the FCC -- and a substantive rule such as 47 C.F.R. § 76.31 is a final order for these purposes, see, e.g., Columbia Broadcasting System, Inc. v. United States, 316 U.S. 407, 417-19, 86 L. Ed. 1563, 62 S. Ct. 1194 (1942) -- may be brought only in a federal court of appeals. Administrative Orders Review Act, 28 U.S.C. § 2342(1); Communications Act of 1934, as amended, 47 U.S.C. §§ 402(a), (b). If the party seeking review was not a party to the FCC's rulemaking proceeding, as the City of Peoria was not, it cannot get review by the court of appeals without first petitioning the FCC to reconsider the rule, 47 U.S.C. § 405, or at least, as we shall see, without seeking some kind of remedy from the agency. And the proper party defendant in the judicial review proceeding is the FCC, not a private company which, like GECCO, may be indifferent to the validity of the rule. We are not so naive as to suppose that GECCO really is indifferent between paying 10 percent of its gross revenues to the City of Peoria and 3 percent; no doubt GECCO is cooperating in the city's efforts to get the rule waived in order to increase the probability that the city will renew its franchise, which expires in four years. But in any event it is the wrong defendant to a suit to set aside the FCC's rule.

As for the district court's assumption of jurisdiction over GECCO's third-party complaint against the FCC, we have never heard of a case where a defendant who interposed a defense based on a law or regulation was allowed to implead the enacting body. Suppose a manufacturer sued a distributor for money owing on a contract, and the distributor, though reluctant to impair his relations with the manufacturer by refusing to pay up, interposed a defense based on the Sherman Act because he was afraid that otherwise the Department of Justice would accuse him of being a party to an illegal contract. Could he implead Congress, which enacted the Sherman Act, or the Department of Justice, which is the principal public enforcer of the Act, on the ground that the illegality of the contract was really their problem, not his? GECCO's third-party complaint against the FCC seems less silly only because GECCO had the forbearance not to implead Congress (the author of the FCC's rulemaking powers) and, more important, because it is not seeking any relief against the FCC beyond a declaration of its rights under Rule 76.31. GECCO is concerned about having inconsistent obligations to the FCC and the City of Peoria. It knows that if Rule 76.31 is valid the City of Peoria's desire for the agreed-upon franchise fee must yield, so it wants the district court to tell it whether Rule 76.31 is valid.

But even that is beyond the power of the district court. GECCO cannot simply put to the district court the abstract question whether Rule 76.31 is valid, for it cannot receive an advisory opinion from a federal court. It must ask the court either to declare the rule valid or to declare it invalid. If the former, its suit against the FCC would be nonadversary; the FCC will not argue that its rule is invalid, so there will be no case or controversy within the meaning of Article III of the Constitution. If GECCO wants the rule declared invalid, then its plea for declaratory relief is in effect an action to set aside the rule, brought in a court that has no jurisdiction over such actions. Finally, since GECCO cannot seriously be contending that if it loses to Peoria in the original suit the FCC "may be liable to [GECCO] for all or part of [Peoria's] claim against [GECCO]," Fed. R. Civ. P. 14(a), GECCO's third-party complaint is in any event outside the impleader jurisdiction that has been conferred on the federal courts.

That leaves only the diversity count in Peoria's complaint to be considered. As GECCO and the City of Peoria are citizens of different states and the amount in controversy between them exceeds $10,000, there is federal jurisdiction under 28 U.S.C. § 1332 of the subject matter of this count, which alleges a breach of the franchise contract under state law. GECCO's defense is that if it complied with the contract it would be violating federal law -- Rule 76.31 -- which, if valid, of course preempts any inconsistent state law. Cf. Brookhaven Cable TV, Inc. v. Kelly, 573 F.2d 765 (2d Cir. 1978). We have to decide whether the district court, though it had subject matter jurisdiction, was authorized to decide the validity of GECCO's defense.

It was not. As noted earlier, the City of Peoria could not have gotten the FCC's rule reviewed by a court of appeals without first asking the FCC to reconsider the rule; it would be strange if, still without going to the FCC, Peoria could get judicial review in both a district court and a court of appeals. True, Peoria was not a party to the rulemaking proceeding. But 47 U.S.C. § 405 requires nonparties to petition the FCC for reconsideration before they ask a court of appeals to review an FCC order; and the policy behind this requirement -- one of routing all challenges to rules and (other) orders of the FCC initially to the FCC -- is equally applicable whether the nonparty wants to challenge the rule directly, in a judicial review proceeding under 28 U.S.C. § 2342(1), or indirectly, by suing someone who can be expected to set up the rule as a defense in the suit.

This is not to say that the City of Peoria had to go to the FCC before it brought its breach of contract action against GECCO. The doctrine of exhaustion of administrative remedies, as conventionally understood, has application only when a suit is brought to challenge an administrative order. Count I of Peoria's complaint was such a suit, and exhaustion would have been required if the district court had otherwise had jurisdiction over the subject matter of that count. But Count II, the diversity count, was not a challenge as such to an administrative order. Until GECCO pleaded the FCC's rule as a defense the city could not be certain (though it could be, and Count I suggests was, pretty confident) that it had to get the rule waived or invalidated in order to collect the agreed-upon franchise fee in full. But once the defense was pleaded, the proper procedure was for the district judge to stay the proceeding before him while Peoria went to the FCC for a determination of the validity and application of the rule. See United States v. Michigan National Corp., 419 U.S. 1, 4-5, 42 L. Ed. 2d 1, 95 S. Ct. 10 (1974) (per curiam). GECCO's interposing a defense that brought in matters within the regulatory responsibility of the FCC triggered the doctrine of primary jurisdiction, whereby a suit is interrupted because it involves an issue (here the validity and application of Rule ...

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